Fonterra Co-operative Group announced today a final Cash Payout of $8.50 for the 2014 year for a 100 percent share-backed farmer, comprising a Farmgate Milk Price of $8.40 per kgMS and a dividend of 10 cents per share.

Chairman John Wilson said that the Cash Payout to the Co-operative’s 10,500 farmer shareholders was the highest ever made since Fonterra’s formation in 2001.

“The Farmgate Milk Price on its own represents an injection of more than $13.3 billion to the New Zealand economy for the season.

“It is a strong result, reflecting the determination of our farmer shareholders to lift on-farm performance, matched within the business by a focus on driving revenue.

“Our farmers took advantage of good conditions to produce 1,584 million kgMS, eight percent more than last season, to make the most of the good prevailing prices early in the season.

“North Island volumes were up nine percent at 969 million kgMS, while the South Island delivered a seven per cent rise in volumes to 615 million kgMS.

“A very good spring saw our farmer shareholders achieve record milk production through an extended peak, stretching our production capacity for powders. This led to early impacts on stream returns from the less valuable products we were forced to make.”

Fonterra CEO Theo Spierings said the Co-operative had come through a very demanding year.

“We have continued to stay on track with our strategy, focusing on securing the best returns to our farmer shareholders.

“We achieved record revenue of $22.3 billion for the year, a direct result of the focus on achieving the highest possible revenue line that is good for the Farmgate Milk Price.

“Constrained margins in our foodservice and consumer businesses and on non-milk powder products were the knock-on effect, contributing to a 27 per cent rise to $19.8 billion in the cost of goods sold. However, we maintained our focus on efficiency and achieved a two per cent reduction of $46 million in our operating costs.

“Our higher cost of goods sold, along with higher interest and taxation, saw our net profit after tax decline by 76 per cent to $179 million.”

Strategy in action

Mr Spierings said 2014 was a tough but defining year and Fonterra had held to its strategy. High commodity prices, while good for farmers, had put margins under pressure in Fonterra’s consumer and foodservice businesses.

“We focused on building volumes and value in our key markets, especially Asia and Latin America,” Mr Spierings said. “In Asia, we saw volume growth of 12 per cent, primarily driven by excellent performance in China. In Latin America, our Soprole business’ focus on new product development and innovation contributed to the region’s three per cent volume growth.

“However, our New Zealand and Australian businesses had a challenging year due to much higher input costs and competitive pressure that constrained our ability to pass these on. These businesses are now on a firmer footing to lift their performance in the current financial year.

“Very strong milk flows and an extended peak season stretched our powders capacity and forced us to make lower-returning products. We fast-tracked investments to expand our New Zealand capacity and undertook immediate projects to maximise output from existing plant.”

In addition to the $235 million expansion at Pahiatua, the Fonterra Board in August approved $555 million of investment in a new high-efficiency drier at Lichfield and three additional plants at Edendale.

At the same time, Fonterra is supporting the growth of its foodservice and consumer businesses by investing $126 million in a UHT plant at Waitoa, $72 million in expanding its mozzarella capacity at Clandeboye, and a $32 million expansion at Eltham.

Mr Spierings said Fonterra had made positive steps forward this year in complementing New Zealand milk supply with milk pools offshore, protecting the Co-operative’s scale in order to remain truly globally relevant.

“Our global partnership with leading infant food manufacturer Beingmate in China puts our high-quality dairy ingredients in a strong position to capitalise on the opportunity in China’s rapidly growing infant formula market with a respected local partner.”

Good progress was being made in securing the necessary regulatory approvals and proceeding with the partial tender offer as part of the Beingmate transaction, Mr Spierings said.

While the fundamentals for dairy remained strong, the revised forecast reflected current high levels of volatility, said Mr Wilson.

“The forecast reflects an uncertain outlook for the global economic environment and an expectation of continued volatility for dairy prices driven by geo-political events and the supply/demand imbalance.

“The Board will continue to keep farmers informed as we move through the year.”

Consumer and foodservice margins are expected to recover from the second quarter of this financial year. Stream returns are currently making a positive earnings contribution but it is still very early in the financial year.